Madoff Trustee to Recoup $35.4 Million From Merkin Funds

The trustee seeking money for Bernard Madoff's victims will receive $35.4 million in a settlement with two funds once run by Wall Street hedge fund manager J. Ezra Merkin.

According to settlement papers filed late Friday with the U.S. bankruptcy court in Manhattan, the payment will be made by the Ariel Fund Ltd and Gabriel Capital LP feeder funds, through their receiver Bart Schwartz.

In exchange, the trustee Irving Picard will deem valid about $367.9 million of the funds' claims against the former Bernard L. Madoff Investment Securities LLC. Ariel and Gabriel Capital will be entitled to $179.5 million of "catch-up" distributions.

The accord requires court approval, and the funds did not admit wrongdoing. Picard is still seeking an additional $280 million from Merkin, his Gabriel Capital Corp, and his Ascot Fund Ltd and Ascot Partners LP feeder funds.

Andrew Levander, a lawyer for Merkin, was not immediately available on Monday for comment.

Friday's settlement would add to the roughly $10.7 billion that Picard has recovered for Madoff customers, who he estimates lost about $17.5 billion of principal.

It is separate from Merkin's $410 million settlement in June 2012 to resolve New York State's claims accusing him of secretly steering client money to Madoff.

Picard had challenged that settlement as having interfered with his exclusive right to seek money for Madoff's victims, but multiple federal courts rejected that contention.

In a lawsuit that began in May 2009, Picard had accused Merkin of sending money to Madoff despite knowing about the swindler's Ponzi scheme.

Last August, U.S. Bankruptcy Judge Stuart Bernstein rejected that allegation, but said Picard could argue that Merkin willfully blinded himself to the fraud and ignored red flags.

The judge said Picard could try to recoup $315 million, including the $35.4 million in Friday's settlement, transferred to Merkin's funds in the two years prior to the Madoff firm's December 2008 bankruptcy.

Last week, former U.S. Securities and Exchange Commission chair Richard Breeden said roughly 11,000 additional Madoff victims, including feeder fund investors, may recoup some losses through a $4.05 billion fund he oversees.